Stocks down, bonds up. It’s a classic pattern developing now just days before the US election. The S&P 500 has lost ground for seven sessions running – something which happened after Lehman Brothers collapsed. The market’s in the longest funk in five years, and meanwhile the VIX has increased by 48% in a week (that’s the so-called ‘fear index’).
While equities fret, bonds plump. Prices have been rising as money worms its way into perceived safe havens in advance of November 8th. (On stock markets, trading is up 25% over the recent average.) In 20 of the past 22 presidential election contests, the S&P 500 has advanced in the five days before the vote – climbing an average of about 2% in that period going back to 1928. This time – with three days left before the big event – the index is down 1.3%. Not a big move, but a big deal.
Is this signalling Wall Street’s belief the Trumpster will prevail?
Nah, not really. Most people still believe Clinton will win. It’s more about Brexit than anything else. Just four months ago traders were caught massively offside when UK voters did the unexpected, the illogical and the irrational thing. There’s a strong desire not to be ambushed this time, which accounts for much of the movement we’re seeing.
There’s more to worry about, too. After the Fed’s statement on Wednesday (no rate hike, but hawkish lingo), the market is giving 80% odds for a rate hike in the first week of December, up from 67% before the announcement. Higher rates have been on the agenda, like, forever – but the moment of truth seems to be approaching, Trump or no Trump. (By the way, he’s shellacked Janet Yellen for keeping rates too low, too long.)
Meanwhile Friday morning the latest labour stats come out, a key indicator of US economic health. If they’re decent, the Fed goes for sure. If they suck, it feeds Trump. As we all know, the Clinton momentum is now negative. A week ago she had at 82% chance of being prez, and by Wednesday night that had sunk to 69%. However about double the usual number of Americans voted in advance polls, which is thought to favour the Democrats. Clinton leads narrowly in polls of independents, while Trump is poised to finish strongly among those who decide their minds at the last minute.
In short, nobody knows the outcome. Just like Brexit. Or the Scottish referendum. But there’s certainly more caution in the air than just days ago.
Does this mean you should panic and turn your RRSP into cash?
That would be just silly.
Trump as POTUS would be a surprise. It would prove democracy’s big flaw – in which an undeserving, inexperienced and unproven person wins office because most people hate the other candidate’s guts more than they fear the flake. But President Trump would not change the reason markets have strength. Corporate profits would not plunge. Hiring wouldn’t cease. The GDP would not start contracting, the currency collapse, house and car sales dry up or anything much happen to taxes, health care or government spending. In Washington Trump would be an outlier from Congress, where the rules are actually written.
Selling in advance of the vote, incurring trade costs or triggering capital gains, is as dumb as selling after the vote if markets do a Brexit-like swoon. If you have a balanced portfolio (40% safe stuff and 60% growth) which is globally diversified ( about 17% Canada, 21% US, 18% international, 4% alternative) with a broad range of asset classes (government, corporate and high-yield bonds, preferreds, REITs and equity ETFs) then just ignore the noise. Your accounts will dip less than the stock market and recover faster, thanks to the fact you have assets that rise in value (fixed income) while others (stocks) shed it.
Of course, most DIY investors will ignore this and do the headless chicken thing. It’s why they almost always fail. Over and again history’s proved that investors with good, diversified assets and reasonable balance cruise through crises, while the market-timers end up being lunch. There’s little doubt this will repeat in the next three trading days. Pray for them. They know not what they do.
By the way, I asked my smartypants, know-it-all, suspender-snapping, Bay Street, high-priced, omniscient professional portfolio manager partners Doug Rowat and Ryan Lewenza for their advice on the potential Trumpinator effect last night during our weekly call with clients. Here’s what they had to say.
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Fresh numbers out of the Van real estate board. As expected, ugly, showing the collapse in sales continues and confirming that this market peaked back in March (as we have been telling you since June). Sales of detached houses last month were down an awesome 54%.
Also worth noting: the realtors messed up September prices, apparently, publishing the wrong Frankenumber. It could be off as much as 5%, or $78,000. Oh well…
And here’s the latest from the crazed beaver of a housing analyst Ross Kay, who’s really enjoying watching the market disintegrate (because he predicted this). Whether the realtors admit it or not, and despite whatever statistical diddling is taking place, he claims the average price has fallen 19.7% since the implementation of the Chinese Dudes tax at the end of July, and 21.7% since peaking in March.
Well, whatever it is, there’s more coming.